In a chat with ET Now, Parag Thakkar, HDFC Securities, says there is very little value left on the table in short term. Of course if monsoon is good then everything changes. Edited excerpts

ET Now: The standout performer today is arguably Zee Entertainment. A splendid performance and therefore a 7.5 per cent move. But what did you make of the numbers? If you track it, what would your advice be to investors who are wondering what to do with the Zee now?

Parag Thakkar: One who has already bought the shares, should hold on to it. There is no doubt about it. I am not sure whether we should buy fresh today because the stock is now very expensive. Of course, the subscription revenue pack which is an annuity kind of a business, growing at 16 per cent is a great new, plus advertisement avenues definitely is going to pick up because for Zee most of the advertisements comes from FMCG players. Of course now e-commerce has also become very big. On FMCGs, there is competition from Patanjali and so all FMCG companies like Colgate, HUL are going to spend very aggressively. So macro call wise, definitely it fits into all the criterias. So it is a hold for somebody who already has no doubt about it.

ET Now: If one was looking to buy?

Parag Thakkar: Then one should see today is a great day. Results have come. So there is lot of euphoria. Let markets sometimes correct and you will get the opportunity to buy at lower levels.

ET Now: What would you be doing right now at 7833-7840 or 25550 for the index? What is the call? Is it go out and buy selectively or just wait for a bit of a dip to come in?

Parag Thakkar: Definitely, the market outlook is very cautious and there is nothing wrong in India. India was on a very solid footing. No doubt about it. Our tax collections are so robust. For the current account, we are about to get surplus. So basically, the government spending on roads and rural India is now visible. Cement, two wheelers, car, everywhere we are seeing green shoots and if monsoon is as predicted above average, then definitely there will be great earnings revival.

So on India, we are on a solid footing. There is no doubt about it but on the global front, I am very much sceptical because China’s debt to GDP is now 250 per cent and they are pump priming the economy. There is no doubt about it and that is where we saw this cyclical recovery in metals and all that stuff. Plus, in Europe, you have a Brexit fear and in US also the last jobless data created a situation, pushing the June Fed rate hike off the table. But actually the wage growth is 2.5 per cent and there is 5 per cent unemployment. So I do not think it is so easy to take. I think global worries are there and on the domestic front, the only problem is that all good quality stocks are valued reasonably well.

So there is very little value left on the table in short term. Of course if monsoon is good then definitely everything changes but so that is why we are selecting stocks where the last two years were not that great and if monsoon comes or if economy take the picks up then we have significant earning revival and there is no leverage in the balance sheet so something like Rallis India, yes something like in the NBFC space we have been very bullish on Chola earlier now we are recommending Sundaram Finance because they have been a very very conservative management and so they decided not to grow aggressively either their home loan book or vehicle finance book. Now with economy turning around they will pick and you have a company which is making 2.6% ROA so those ROA is top of the quartile where valuations are not top of the quartile if you consider their subsidiary valuations and subsidiary valuations around 4000-4500 crore out of their Rs 14500 crore market cap so something like Repco where we feel that the story has just started in terms of affordable housing.

ET Now: Sugar stocks have been rallying and their numbers this quarter around have looked good. If you bring up the three month chart and all the sugar names, March was a period when there was a big rally for all of those stocks. Are you convinced by the story because part of the market believes that this is the turn of the cycle?

Parag Thakkar: So basically, we have been bullish on Balrampur Chini. If you remember, it was at around Rs 65 levels when I was on your show. Of course, EID Parry is also there. But now I feel that if something comes up on the UP sugarcane policy, then there will be a structural big positive for the industry but from sugar prices perspective, it was Rs 19 in August and now we are at Rs 34. Most of the sugar companies breakeven at Rs 32. So now it is above breakeven level plus they have that molasses ethanol business also and power business as well. Those two are annuity businesses which are non-cyclical in nature. So the government is pushing for higher blending of ethanol. They have a huge demand for ethanol and both from OMCs and from liquor companies. So things are looking better for them, no doubt about it.

ET Now: Hold the companies, hold the stock.

Parag Thakkar: But I would say that these are very highly cyclical businesses. So I would say that one should book some profits when this quarter’s results will be great. This is a good time to book partial profits I would say.

ET Now: Any thoughts on Biocon?

Parag Thakkar: So Biocon, I think last time on the same show I think the results came and the Japanese approval came in, after that the stock has been doing very well. So it is 20 per cent from that show to this show so I think…

ET Now: It will be 20 per cent from this to the next. It was a month back I think.

Parag Thakkar: Yes one-and-a-half month I think. The story is on the right track in terms of its approvals and very high potential areas like Japan and all for insulin but this stock has also rallied significantly. So definitely, when a stock is rallying, 20 per cent in one month, it is time to be little bit cautious.

ET Now: Do you track this one? Do you look at the numbers of Asian Paints?

Parag Thakkar: Yes, definitely we track it and we like the company but the only point is that again there is same problem. The market cap is around Rs 85,000 crore for a profit of around Rs 1700 crore. It is trailing earnings 50 times. So I am not sure what is on the table. So that is the problem. But as I told you, in a world where the interest rates are zero and you have such high quality businesses, even if the growth rate volume is in double digits, people are ready to buy the stock. That is the problem I think. EBITDA numbers are absolutely in line.

ET Now: They are chalk and cheese in terms of size as well – Repco versus Sundaram Finance and they are both in the NBFC space. Chola is not too bad either. So where would your preference lie?

Parag Thakkar: Chola because we like how it moved from Rs 500-550 levels and now it is already at Rs 900 levels. It remains a great story, no doubt about it. Now it is trading at three times book. Vehicle finance, commercial vehicle was a big laggard in the last two years. So the cycle had picked up significantly. Now I am expecting that kind of cycle to play out in affordable housing post this budget. So something like Repco which is also expensive at three times FY18 book but trading at around 16 PE multiple and can easily grow at 25-30 per cent. Plus they will not dilute for another two-three years. That is what I heard in the media interviews of the management today and ROA of around 2.2 per cent. So it is a good, continuously growing, annuity business. I would like to go with this kind of companies. Chola, Sundaram kind of companies also benefit because they have a bank borrowing and as the banks cut the base rate, their cost of borrowing comes down. While they have lent it at a fixed rate for three years, the margin has also expanded. So on one side book grows, on the one side margin expands. It has double benefits.

ET Now: Quality banks are delivering numbers but are extremely expensive. It is 3.5 for Kotak, maybe 4 for HDFC, HDFC Bank. HDFC itself will be about 3.8-3.9 price to book as well. Can they stay this expensive or at some point of time, people will come out and buy the ICICI Banks and the SBIs?

Parag Thakkar: See Kotak Bank has been my favourite.

ET Now: You like the results?

Parag Thakkar: Yes, yes. Of course, the results were good. NIMs were around 4.35 per cent and even after this, ING Vysya Bank integration which was a very difficult one, have been managed very well and I think from here on there is no stopping. They can grow at 20 per cent. I do not know for how many years and plus they have got a lot of subsidiary valuation also building in. The insurance business will become very big. Mutual fund business can become big plus they have NBFCs like Kotak Prime.

So I think the market has rewarded the conservative lenders significantly. For example, Kotak’s market cap today should be Rs 1,35,000 crore. Their total book is Rs 1,40,000 crore. It must be the only financial company which is trading at closer to its total AUM because of its conservatism. They deserve it and in a world where the money is so cheap, but growth so rare, you are bound to see that quality gets higher multiples. Of course, this will change once the economy picks up. Of course, I am not saying Kotak’s multiple will come down but the outperformance of something like ICICI Bank will pick up when economy really turns up and when the asset quality starts to stabilise. I think that is the time you will see some sort of valuation gap narrowing down.

ET Now: There will be valuation catch up for ICICI Bank though. It is pretty much at the lower end.

Parag Thakkar: Correct. So what I am saying is that once you see the asset quality improving, ICICI Bank can get re-rated significantly.

ET Now: The telecom sector got a big shot in the arm today. The call drop case has been off those highs. The stocks have come off quite rapidly. What gives here? How do you approach investing here?

Parag Thakkar: So the near term headwind of course remains the Reliance Jio launch and when the talks are that they launch the data at a 30% lower than current prevailing rates and data has been the driving force for telecom companies since last three years. So I think there will be that sort of near term headwind will always remain but let us see in many times in markets this kind of fear is exaggerated so I think let us see what happens but at some price points they are definitely good buys considering this a very very strong cash flows.

ET Now: Idea is debt burden, Bharti is not quite as bad so what do you do?

Parag Thakkar: So unlike other cyclical sectors these guys have a very decent annuity kind of cash flows unlike something in steel or something in a very highly leveraged cyclical sector. These guys make genuinely big cash flows and so it should not be a problem for them to service debt. So as I told you, it is not a secular buy at any price. It is a buy at a particular price because it is a value buy definitely but it is not a great growth story to be in.

Separately, RCom initiated contempt proceedings in the apex court against the Department of Telecommunications, blaming it for delaying a spectrum sale that would have enabled dues to be paid to Ericsson and lenders.